Selling business to avoid RMD

Submitted by Michael Eastham on Mon, 2017-07-17 22:16

My client is 69 years old and currently a 95% owner of his law firm. he does not plan to retire any time soon, but currently has a minority partner owning the other 5%. He does hope to sell his business at some point in the near future. He has a 401k plan at his firm. would he be able to sell a total of 96% of his business and remain an employee so that he could continue to contribute to the company 401k, and delay RMD’s on this account?

Independent question: can an employee possibly roll another IRA into his 401k so that he could delay RMD’s on the IRA?



Submitted by Ben Meyer on Mon, 2017-07-17 22:53

Will the sale of the firm be absolute, or will he retain an option to re-purchase some portion of the firm at a later time, or be granted any ownership options as an employee? 

Submitted by Michael Eastham on Tue, 2017-07-18 14:30

Sale of the business will be absolute, with no options to repurchase down the road.  would it make a difference if there was an option, as long as he didn’t exercise the option he would remain a 5% (or less) owner?

Submitted by Ben Meyer on Tue, 2017-07-18 15:53

It seems best to avoid any questions of tangential or potential ownership involvement that would exceed 5%, although i don’t know of any regulations or decisions that would require RMDs under those circumstances.

Submitted by Alan - IRA critic on Mon, 2017-07-17 23:54

Make sure it is not already too late. If he is a 5% owner anytime in the plan year that ends in the year he reaches 70.5, he is subject to RMDs and once he is subject he remains subject. If the plan year is not a calendar year, he needs to consider the effect of that on the deadline to avoid being a 5% owner. He must also watch the attribution rules with respect to WHO he sells to. But if he successfully meets all the requirements and the plan accepts IRA rollovers he could also postpone IRA RMDs by doing an IRA rollover into the plan. Finally, note that 5% ownership to the number does not make him a 5% owner. To be considered a 5% owner he must own MORE THAN 5% interest. 

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